Friday, July 27, 2007

Crash Watch

The Dow ended up down 208.10 (1.54%) today. However, the S&P 500 futures continued to fall after the Dow's close at 3 pm Chicagotime. The futures stay open for another 15 minutes. The futures continued to drop another 7 points; equivalent to about 60 Dow points. They went straight down and the only thing stopping them was that time ran out. Monday could be very, very ugly. Let's hope that no one in the gov't says anything stupid like they want to raise taxes or they don't care how far the dollar falls.

Speaking of the S&P, as you can see from the chart this index has fallen much further than the Dow Industrials and this reflects the weakness of breadth which has characterized this last leg of the bull market. (The Dow is down 5.5% from its high and the S&P 500 is down 6.6%.) Predicting the market is not easy. Calling exact turning points is rare but it wasn't difficult to say that this bull was a little long in the tooth.

It is tough to say what will happen on Monday. I think we will open weak but I would not be surprised to see the market find support. The Dow closed right at the bottom of the triangle and the S&P 500 is near the February highs. Or we could go down a thousand. I might be able to pick a good place to buy in real time but I am not going to attempt to pick one on this blog more than 48 hours before the open. I do know that we are in a very serious correction that will last for months. There is really no point in picking resistance levels either because I am quite sure we are not heading up to 13,700 anytime soon. Just enjoy the ride.

What you are probably not aware of is that as bad as the stock market has looked this week the credit markets, with the exception of US treasuries, have it far worse. This is the narrative the the market observers have picked up on but it really is all the same story. Cheap credit is going away and the prices of securities that were bid up by cheap money are going down. Simple as that. To repeat a theme which I have tried to hammer into your heads: asset price inflation is bad. All types of inflation distort prices making it difficult to know value. On the other side of the coin inflation makes it easy to get caught in the euphoria.